What's Happening?
Japanese insurers are facing significant pressure due to the high probability of two major earthquakes occurring within the next 30 years, as analyzed by S&P Global Ratings. The Nankai Trough earthquake has a 60% to 90% chance of happening, while an earthquake beneath
Tokyo has about a 70% probability. The potential insurance payouts from these events could surpass those from the 2011 Great East Japan Earthquake. Non-life insurers are expected to be hit hardest, with corporate earthquake cover leading to substantial claims. Government damage estimates suggest non-life earthquake-related payouts could reach $26.2 billion for a Nankai Trough event and $7.0 billion for a Tokyo earthquake. Household earthquake insurance would have limited impact on private insurers due to government risk-sharing through the Japan Earthquake Reinsurance Company.
Why It's Important?
The potential financial strain on Japanese insurers from these earthquakes could have broader economic implications. A megaquake could affect Japan's sovereign credit rating due to economic damage and reconstruction costs, placing further pressure on insurer ratings. Despite strengthened risk management, insurers cannot fully avoid the financial strain a major earthquake would bring. The credit impact could exceed that seen after the 2011 disaster, highlighting the vulnerability of Japan's insurance industry to natural disasters. This situation underscores the importance of robust risk management strategies and the need for insurers to prepare for large-scale claims.
What's Next?
Japanese insurers are likely to continue strengthening their risk management strategies to mitigate potential financial impacts. The government may also need to reassess its disaster preparedness and insurance frameworks to ensure adequate protection against future earthquakes. Stakeholders, including insurers and policymakers, will need to collaborate to address the potential economic fallout and ensure the resilience of the insurance industry.
